What If You Could Have Bitcoin Without The Problems Of A Blockchain? IOTA May Be The Solution.

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

I entered the cryptocurrency field in 2013 and watched the price of Bitcoin skyrocket from a low of $100 to over $1000. There was a rush to invest in Bitcoin companies, then in 2014 the price crashed back to $250. Investors that had become interested in the technology started to think, “OK, Bitcoin is dead, but the blockchain concept is an advance. How do we take that coin out and keep the blockchain?”.

Three years of investment later, the world still doesn't have any major live applications of a private blockchain. But what if this was the wrong question? What if the real question was “how do we take the blockchain out of Bitcoin”? What if we could have cryptocurrency, secure/transparent data transfer and decentralized autonomous organizations without a blockchain? This is what the team behind IOTA, a cryptocurrency with a market cap of over $1.2bn USD at the time of writing this, set out to determine.

IOTA

Iota Logo

Why would the blockchain be seen as a problem? It all comes down to scalability and there are three hot button issues: the tiny maximum number of transactions per second, coupled with the cost of storing an entire blockchain and the power hungry cryptographic computing required that may be required to maintain it.

Bitcoin, the original blockchain, is a system that allows for people to exchange cryptocoins in a peer to peer fashion. There is no Federal Reserve issuing Bitcoin, there is no FDIC insuring online wallet systems, by their very nature peer to peer systems do not have a central authority.

The fundamental difference between Bitcoin and any other digital artifact is the fact that the blockchain means only one person can have possession at a time. If I use my cell phone to take a picture of a cute puppy I meet at the park, I can send you a copy of that picture, and then the world is a little brighter for both of us. If I send you some Bitcoin, it disappears from my wallet and appears in yours. There are no counterfeiters in the Bitcoin universe, which is another way of saying that there is no “double spend problem”. There is a fee structure for transactions, it's both linear and transparent, but that doesn't make sense for IoT devices for many reasons.

https://iotasupport.com/foundation.shtml

Iota Team

David Sønstebø, cofounder of IOTA and blockchain veteran, described a few problems with blockchain infrastructure.

In 2014 Serguei Popov and I started exploring the internet of things and convergence between the Internet of Things (IOT) and Distributed Ledgers. The Internet of Things will be made up of billions of sensors and actuators communicating with each other, as well as purchasing things like data and energy. The blockchain does not scale for this use case, nor is it built to do so. You need to build second layer ad hoc channels, which will be fine for local implementations but not for ecosystems with billions of transactions a day.

The blockchain scalability problem revolves around how the system enables peer to peer transactions without double spending. It is a complex system that requires a high number of decentralized miners and nodes to verify the transactions. In order to maintain node decentralization, the number of transactions directly input into a block of transactions, mined every 10 minutes, must be limited. Through the decentralization of nodes, miners, or both, no single verifier has monopolistic power, which is a good thing. However, it comes at the cost of either having a limited number of transactions per second or needing to rely on second layer protocols or services to scale.